Walking around the supermarket, I sometimes find myself wondering why the store is carrying a new product and has discontinued the brand I like. I often picture some wizened merchant in the back room, trying to figure out what the customer wants.

In fact, the products on supermarket shelves are largely determined by the fees that suppliers pay -- and retailers demand -- to get their wares into the nation's grocery stores.

These so-called slotting fees have become standard. A two-year study by the Federal Trade Commission, concluded in November, found widespread use of slotting fees and the sense among manufacturers that such fees are "part of the cost of doing business," said FTC staff attorney Patricia Schultheiss, who worked on the study.

But that doesn't mean they're good business or good for shoppers.

"Oftentimes, the last individual that gets considered and talked about is the consumer," said Jerry Chadwick, an executive with a food broker in the Washington area. "When you look at what really motivates most people to make their decisions, it tends to focus around the economics of the proposal, as opposed to whether you should rearrange the shelf inventory because it makes it easier for consumers to shop the section."

Slotting fees work like this: When a manufacturer wants a supermarket chain to carry a product, that manufacturer pays an up-front fee, which theoretically covers the cost of putting that product into the retailer's system.

Introducing product is expensive

There's no question that retailers incur a cost when they introduce a product: A supermarket must make room for a new product, typically by getting rid of something else, which is risky. It's costly to mark down the merchandise being phased out.

Then there is the cost of labor and materials, from computer software to plastic price labels for the shelves, to get the new product into the retailer's system.

"You can make the case that slotting fees are the grease that makes the system work because many stores do not have the square footage available for all the products that are being created," said Gene Grabowski, a former spokesman for the Grocery Manufacturers of America and now a consultant to the industry as vice president of Levick Strategic Communications in Washington.

Indeed, retailers say consumers can ultimately benefit from slotting fees if they allow a supermarket, with its razor-thin profit margin, to stay in business.

Bottom line reigns supreme

"The retailers need that money," said Mark Polsky, senior vice president for Magruder's Inc., a small suburban supermarket chain. Slotting "goes down to the bottom line. If that bottom line is OK, then you're OK. If it's not OK, then what do you do? You can either cut your help or raise your prices."

The problem with slotting fees is they are unscientific and can therefore be manipulated. A former supermarket executive said the slotting fees at his chain were decided through "a sort of seat-of-the-pants feel for the business."

But this is big money. The slotting fees for bulky items -- cereal and paper goods, for example -- could reach $50,000 or more, brokers say, with little explanation for the number.

The FTC study found that slotting fees "are all over the map," Schultheiss said. Within just the hot-dog category, one of five product groups the commission studied, the agency found one retailer that charged $5,000 and another that charged more than $20,000.

"It's hard to say whether or not there's a direct correlation between how much is charged and how much it costs," she said, because there are no records to check. The report noted, "Many retailers simply do not maintain ... historical, product-specific electronic data on slotting allowances."

What's really happened is that slotting fees have become another way for retailers to make money. In the industry, it's called making money on the buy -- that is, from manufacturers -- rather than on the sell, from customers.

"There's plenty of companies that make money on both, but it became sort of a crutch that grew and grew," said Jeff Metzger, publisher of Food World, an industry periodical based in Baltimore.

Do shoppers come first?

But is the retailer serving the manufacturer or the shopper? Stores that make money on slotting fees have a financial interest in taking on new products whether or not they are products shoppers will want. No wonder 70 percent of the new products introduced at retail fail, as the FTC study says.

Slotting fees also narrow the variety on store shelves because they favor the biggest manufacturers, which can pay the most in fees whenever they have a new flavor, brand or packaging.

According to the FTC, a nationwide product rollout might cost $2 million in slotting fees alone. The little guys just can't compete -- which is why the Senate Committee on Small Business and Entrepreneurship first asked the FTC to look into slotting fees back in 2000.

It's easy to see how slotting fees have become an addiction of sorts for supermarkets. Chains are under constant pressure from drugstores and discounters, which are selling more grocery items.

And a record number of new products is being introduced each year -- 33, 678 food, beverage, health and beauty, household and pet products were unveiled in 2003, according to the Productscan online database of new products, although that figure includes existing products in new sizes or packaging.

It might do retailers some good to use the old-fashioned way to decide which new items to carry, based not on fees but on who their customers are and what they like. They just might sell more that way.

Then again, that would take a wizened old merchant in the back room, and retail doesn't look like that anymore.